Tax cut compromise puts money in workers' pockets

Tax cut compromise puts money in workers' pockets

December 9th, 2010 by Ellis Smith in News


* $900 billion in Bush-era tax cut extensions for two additional years

* Unemployment insurance extended for 13 months

* Employee share of Social Security taxes cut by nearly one-third, to 4.2 percent from 6.2 percent

* Estate tax increased to 35 percent on estates worth more than $5 million

* Earned Income Tax Credit, child credit and tuition credits extended

* Businesses may write off 100 percent of capital investments, up from 50 percent

Source: The Associated Press

Most employees should see their weekly incomes increase between $15 and $26 as part of a compromise between President Barack Obama and congressional Republicans that would slash payroll taxes by nearly one-third.

The $120 billion cut in Social Security taxes would reduce the amount workers pay to 4.2 percent from the current 6.2 percent. The cut would bepart of a larger $900 billion, two-year extension of Bush-era tax cuts.

The cuts are a form of trickle-up economics, said Bruce Hutchinson, professor of economics at the University of Tennessee at Chattanooga. The government hopes that employees who get what amounts to a raise -- $800 to an employee making $40,000 -- will spend the money on goods and services and stimulate the stuttering national economy, Hutchinson said.

"The hope certainly is that the individuals will spend a high percentage of that money on consumption goods, rather than saving it, in order to provide an immediate additional stimulus to businesses," he said.

And while the tax cuts and loss of revenue to Social Security could add to long-term deficits, Congress hopes that "if it's effective in re-energizing the economy, it can be a positive long-run for Social Security" instead of a negative, Hutchinson added.

Charlie Brock, director at Four Bridges Capital Advisors, said the additional dollars in consumers' pockets could help rev up the idling economy.

"People keeping more of their own money are more likely to be spending it on consumer goods, and that helps drive economic activity," Brock said.

East Tech Co. founder Roger Layne said employees at his engineering and design company have had a "rough couple of years," and he thinks the $17 to $18 weekly increase in their paychecks will come as a welcome relief.

"That would almost buy lunch for a few days a week," he said. "Who spends your dollars better, you or the federal government?"


Employers would keep paying 6.2 percent into Social Security, keeping the cost of hiring new workers the same, Brock added.

"More of the money is going to be coming to individuals that are already working because the companies are not getting cuts on their payroll taxes," he said.

Jefferson Cronan, executive director of the Chattanooga branch of financial services firm UBS, agreed that persistently high unemployment rates would be unaffected by the Social Security tax cuts.

Some have questioned whether businesses would treat the payroll tax cut as a federally subsidized Christmas bonus or pay raise and slash corporate bonuses accordingly. But that's not likely to happen in Chattanooga, said Chris Hopkins, adviser for Chattanooga's Barnett and Co.

"I suspect there will be some of that, but not much, other than investment banks that were seriously considering moving up their bonus payment if taxes looked ready to go up," he said.


* One year, 4.2 percent rate reverts to 6.2 percent in 2012

* Cuts apply to most working Americans

* Average worker to receive $15 to $26 additional pay per week

* Worker earning $40,000 per year would get $800 in 2011

* Worker earning $70,000 would receive $1,400 in 2011

* Employers still pay their half of Social Security taxes at 6.2 percent

Source: The Associated Press


Ben Brock, president of asphalt equipment manufacturer Astec Industries, called the tax cuts "a good thing for us."

Big employers like Astec, with a large number of employees, would be marginally affected, he said, "but marginally to the good side."

Hopkins said the tax cut would affect nearly every working American, as opposed to federal income taxes, which only half the working population pays.

"Frankly, I'm amazed by the magnitude of this," Hopkins said.

The plan to cut Social Security taxes was "a way to make the medicine go down a little easier for the progressive base" on the larger two-year extension of income tax cuts, which marks a major break from pre-election rhetoric for Obama, he said.

The Social Security tax cut is designed to replace an expiring provision of the federal stimulus bill that returned up to $400 in taxes to workers with low to moderate incomes.

Contact staff writer Ellis Smith at esmith@timesfree or 423-757-6315. Follow him on Twitter at